Dec 21. ECB’s Long Term Repo Op bigger than expected…but already priced?

Risk assets continued to rally yesterday in front of today’s LTRO from the ECB, which indeed was better than expected with EU489 bln lent of 3 year funding.  The question is whether the carry trade will truly allow time for gov’ts to make structural fiscal adjustments.  Certainly bank balance sheets will improve due to ECB largesse.  As of yesterday Spain’s 2 year yield had already fallen a couple of hundred basis points, back to where it was prior to the recent rate flare-up…has the bulk of the market move already occurred?  Short term funding scares have likely been tabled for now, a necessary improvement for peripheral budgets but not a panacea.  
–Regarding funding, 3 month LIBOR setting continues to rise, now around 57 bps and well through the high spike from June 2010 (when SPX was more like 1020 as opposed to 1250 now).  So this rate is now more than twice the 2 year treasury yield (25 bps), which should spur lending into the real economy as opposed to treasuries…but it seems like the addiction to govt subsidized rates will be hard to break. 
–India’s Sensex index made a new low yesterday…lowest level in 2 years.  Shanghai composite has also been sinking, as has most of Asia.  Nikkei is near the spike low of the earthquake and tsunami.  So, Asia might not be the engine for the world..  However, declines in many major world stock indices over this year are unlikely to be repeated next year (though I think it will be a rocky first half).
–Existing Home Sales and US 7-yr auction today.

Posted on December 21, 2011 at 7:14 am by alexmanzara · Permalink
In: Eurodollar Options

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